A large number of well-established companies were once trading for under £1 a share, including Ford, JD Sports and Monster Beverage. Those who invested in these companies during their penny stock days could have made a substantial gain over time. Read ahead for everything you need to know about trading penny stocks, including how-to identify good penny share opportunities.
What are penny stocks?
Penny stocks or penny shares are a common stock that trade for less than £1 on UK stock exchanges or less than $5 on US stock exchanges. The low share price means the stock is likely to be a highly speculative investment.
Although the definition of a penny stock is a stock that is valued under £1 or $5 in the UK and US respectively, they have been expanded to cover stocks valued over these guideline prices. But generally, penny stocks have low share prices. They are usually characterized by very high volatility and are seen as higher-risk stocks, with the possibility of significant growth.
The appeal of trading penny stocks and penny shares in the UK is easy to see. If you have £1,000 to invest, you can get a considerably larger share percentage in a smaller company whose shares are trading for a few pence, rather than buying blue-chip shares which may cost much more for an extremely small percentage of ownership. And of course, if your penny share one day goes on to join the blue-chips, you could end up making large returns with the right trading strategy.
Penny stock market analysis
Penny stock markets are well known for being extremely volatile, and price fluctuations of around 20% are very common. Therefore, it is essential to conduct a thorough analysis while following your risk-management strategy before deciding whether or not to go forward with any trading decision. It is also best practice to trade in industries where there is large market growth as opposed to industries that are declining.
Penny stocks in the UK and internationally tend to not see much daily trading volume on the stock markets, therefore it often doesn't take a large buy or sell order to move the price. If plenty of people are talking about a penny share, on internet forums for example, that could also influence the price. It is important not to get sucked into an investment just because it has had a large one-day move and you are afraid of missing out. What goes up quickly can come down even quicker – so make sure your reasons for investing are the right ones.
Trading penny stocks is an extremely risk-tolerant trading strategy, for the investor that is more risk-averse, a strategy involving undervalued stocks may present a better opportunity for speculative growth opportunities.
Penny stock cost management
If you’re happy with your research and have made your trade, another key point is don’t forget to sell. For example, let us say you are fortunate, and the value of the penny stock moves in your favor and, for the sake of argument, it doubles. It can be very easy to sit back and wait for it to double once more. This is not always going to happen, and you should have a strategy in place for when it does not.
When sentiment changes on smaller shares its price can about-turn very quickly, taking all of your hard-won profit, and maybe more. Getting into the position is only half the plan of trading, in fact, some would say it accounts for less than that. Where you get out will determine just how successful penny stock trading could be for you.
The best penny stocks to trade
Trading opportunities on thousands of your favorite global stocks, is available some of which are penny stocks in the UK and internationally. Penny stocks are often small or start-up companies chasing growth opportunities, though you will also find some big brand names that have experienced steep downtrends in their market value.
Many well-known brands once traded at penny stock levels, including Monster Beverage (NASDAQ: MNST), Ford (NYSE: F), SiriusXM (NASDAQ: SIRI), and pharma penny stocks such as Novavax.
When trading penny stocks it can be hard to distinguish between companies that have promising growth prospects and companies that do not. Therefore, it is recommended to thoroughly research companies you wish to trade before considering to buy the stocks.
Penny stock example
Penny stocks can be traded in the same way as any other market on the trading platform. When trading penny stocks you either go long and ‘buy’ or go short and ‘sell’ the asset. The option to ‘buy’ or ‘sell’ offers the trader to play both sides of the market, doubling the potential opportunities available in penny stock markets.
An example of a UK penny stock listed on the London stock exchange is Petra Diamonds.
As of March 2020, Petra Diamonds was trading for around 1.20p, with a market cap of just £10.4m.
Just 3 months earlier, Petra Diamonds was trading at 9.40p, around a 90% upside.
Although there can be large gains when trading penny stocks, there are also risks of losing a significant amount of your investment in a short period. We recommend using ‘stop-loss orders’ to limit your losses and ‘take profit’ orders to capture profit in an automated manner.
If you believe that the price of Petra Diamonds could increase in the future, you could go ahead and open a ‘buy’ position. As the stock price is so low, if the company ever made a comeback you could reap large rewards. However, the chances of the stock staying stagnant or losing more value are also just as possible.
Where to trade penny stocks?
With CFD trading, you can access and trade your favorite financial instruments from around the world on one streamlined platform. This includes thousands of shares, including some penny stocks in the UK and other penny stocks from international markets like the US.
Source: CMC Markets UK